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With Ontario’s government now decided, the governing begins. And it will be a challenging task. Ontario faces economic challenges that we ignore at our peril. The pace of growth has declined, and it is permanent, not temporary. The government debt of Ontario is high, and still rising. The productivity of Ontario business is low, and barely increasing, while its innovation performance is poor and shows only isolated pockets of improvement. The Ontario cost base, from electricity to regulations to congestion is relatively high, and shows few signs of becoming more competitive. As the Jobs and Prosperity Council bluntly observed, the status quo is not an option for Ontario.

Growth in Ontario, long the stalwart of the Canadian economy, averaged roughly three per cent annually from 1980 to just before the global recession, but is now heading downwards to a long term growth path of only 2.1 per cent per year according to the government’s Long-Term Report on the Economy, or even lower by other estimates.

This massive decline in Ontario’s potential growth is the result of a variety of interconnected factors: aging demographics, weak productivity growth, structural shifts in manufacturing competitiveness and sustained weakness in our traditional trading partners. What is clear is that a failure to rebuild Ontario’s growth capacity will affect everything from the affordability of public services to the number and quality of jobs to living standards.

While long-term growth in Ontario is poised to decline by more than 30 per cent, net government debt has been on a serious upswing, ballooning 85 per cent between 2007 and 2014. Net government debt today stands at about 40 per cent of GDP, atypically above all other provinces except Quebec and considerably higher than the federal government.

The saving grace so far has been extraordinarily low interest rates, which have reined in the costs of servicing all this new debt. But, as rates eventually begin to return towards more normal levels, the proportion of each revenue dollar that goes to service the debt will rise, putting more pressure on the fiscal framework. And these pressures will only be exacerbated by declining long-term growth in Ontario. Without the implementation of viable fiscal and growth strategies, Ontario runs the risk of a ratings downgrade.

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Restoring growth will require structural changes in both government policies and corporate behaviours. A key element will be reinvigorating productivity performance in Ontario. The facts are dismal: between 1985 and 2000, business productivity growth in Ontario averaged 1.3 per cent annually compared to 2.1 per cent per year in the United States. Since 2000, the gaps have actually widened, not narrowed, with productivity growth slipping to 0.4 per cent annually in Ontario, while the pace in the U.S. picked up. The consequences are real for all Ontarians: less competitive firms, lower growth in sales and employment, and downward pressure on wages and profits.

While there is no single causal factor, both business and government must be part of finding solutions at a cost and scale that work. Ontario businesses are laggards in innovation by any global benchmark and there is significant corporate under-investment in leading edge capital equipment and information technologies compared to our competitors. High-tech startups have a disproportionate impact on growth and jobs in countries like Sweden, Denmark and Israel, as well as regions such as California and Boston, but Ontario has been slower to translate our high-quality research capabilities and excellent graduates into entrepreneurial, globally oriented, new firms.

Worryingly, Ontario has had much less success in diversifying its export markets to the dynamic emerging economies in Asia, South America and elsewhere than either the U.S. or Europe, and this is costing us exports and jobs. Part of this is too few SMEs in Ontario engage in commerce in international markets. Ontario may be a trading province, but it is not yet a province of global traders.

On the cost front, much has been done to reduce the tax burden on businesses, from significant reductions in the statutory corporate tax rate to the harmonized HST to lower payroll taxes than many other international jurisdictions. However, other public costs, both explicit, such as electricity, and implicit, such as rising congestion, have increased relative to competitor jurisdictions in the U.S. and elsewhere and this requires new thinking and new approaches.

Ontario has many long-standing strengths and some pressing economic issues. How well and how quickly it adapts to the changing global economy, and tackles its economic and fiscal challenges will shape the province’s prospects for the long run.

Kevin G. Lynch is Vice-Chair of BMO Financial Group. From 2006 to 2009 he served as Clerk of the Privy Council and Secretary to the Cabinet in Ottawa.

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